ATLANTA – Norfolk Southern has pruned its intermodal network and made the operating ratio a key component of its executive compensation plans, the railroad announced yesterday amid its proxy battle with activist investor Ancora Holdings.
NS has eliminated 53 low-volume intermodal lanes — or 15% of its intermodal network — that had limited growth prospects. The railroad did not say how much volume would be lost as a result.
“A comprehensive review and optimization of the Intermodal network has eliminated lanes that do not have the density to meet productivity targets,” the railroad said.
“This effort reduces network complexity, supporting the company’s efforts to drive fluidity and productivity. It frees resources to improve service in lanes that are of greater strategic value to customers, driving growth and accelerating profitability improvement, while reducing conflict to the speed and efficiency of the Merchandise network,” NS said.
Ancora has said that NS is too dependent on low-margin intermodal traffic, and that giving intermodal trains priority hurts service for lucrative merchandise traffic.
NS reports that in the two weeks since hiring Canadian Pacific Kansas City executive John Orr as chief operating officer, the average train speed for its merchandise network is up 8%, while terminal dwell is down by 8%, and the number of active trains is also down by 8%.
In an organizational shift, Norfolk Southern’s intermodal and automotive operations group now reports to Orr. It previously was a part of the railroad’s marketing division.
“This change will instill additional operational rigor, enhance opportunity for further productivity, and improve alignment and coordination across the business, including in Merchandise and Bulk. This organization joins Car Management, which has also been moved into Operations,” the railroad said.
Under the service resiliency and growth plan that CEO Alan Shaw announced in December 2022, NS reduced the emphasis on the short-term operating ratio. To underscore the change in focus, the NS board removed the operating ratio as an element of the 2023 executive compensation plan.
But the railroad’s board yesterday reversed course. It made the operating ratio the largest component of the 2024 annual incentive compensation plan. Bonus targets now are weighted 30% to the operating ratio, 25% to operating income, and 15% to revenue growth.
Previously the plan was tied to growth in operating income (40%) and revenue (30%).
“Following extensive shareholder feedback, the board determined to explicitly include OR improvements as a component of our 2024 compensation plans in line with our commitment to hold management accountable,” John R. Thompson, chair of the board’s human capital management and compensation committee, said in a statement. “As management continues to drive productivity throughout Norfolk Southern’s network, OR improvements will be a key component of our long-term success and enable us to achieve our objective of delivering best-in-class value to shareholders.”
NS is aiming for an operating ratio below 60% by 2026, assuming that freight volume rebounds.
Ancora has been critical of NS’s lack of focus on the operating ratio and its lagging financial performance. And Ancora says its preferred management team would hit a 57% operating ratio goal within three years.
NS has called Ancora’s plans a short-term slash-and-burn strategy that would lead to furloughs of as many as 2,000 employees. Productivity improvements are the largest component of the railroad’s goal to reach a sub-60% operating ratio.
“The initiatives announced today will help us progress toward our strategic goals and close the margin gap with our peers,” Shaw said in a statement. “Our network enhancements and improvements to our reporting structure will empower our new chief operating officer, John Orr, with the scope to implement his scheduled railroading plans and accelerate our operational improvements. This positions Norfolk Southern to become a more productive, resilient, and efficient railroad, and drive long-term value creation.”
Ancora aims to gain control of the NS board and name former UPS executive Jim Barber Jr. as CEO and former CSX operations boss Jamie Boychuk as chief operating officer. Absent a settlement, NS stockholders will vote on the matter at the railroad’s May 9 annual shareholder meeting.
Shippers and rail labor have backed the NS management team and strategy, while regulators have expressed concern about Ancora’s plans.
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